Urban Co-operative Banks(UCBs)
Recently, a Reserve Bank of India (RBI)-appointed committee has suggested a four-tier structure for the Urban Cooperative Banks (UCBs).
• In June 2020, the Central government approved an Ordinance to bring all urban and multi-state co-operative banks under the direct supervision of the RBI.
• In January 2020, the RBI revised the Supervisory Action Framework (SAF) for UCBs.
About the Expert Committee on UCBs
1. The committee was set up under the chairmanship of former RBI deputy governor N.S. Vishwanathan.
2. Mandate: To examine the issues and to provide a road map for strengthening the Urban Co-operative Banks(UCBs) sector.
4-Tier Structure for Urban Cooperative Banks
• Based on the cooperativeness’ of the banks, availability of capital and other factors, UCBs may be categorised into four tiers for regulatory purposes:
o Tier 1 with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs 100 crore.
o Tier 2 with UCBs of deposits between Rs 100 crore and Rs 1,000 crore.
o Tier 3 with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore.
o Tier 4 with UCBs of deposits more than Rs 10,000 crore.
• The minimum Capital to Risk-Weighted Assets Ratio (CRAR) for them could vary from 9% to 15% and for Tier-4 UCBs the Basel III prescribed norms.
1. The committee suggests setting up the umbrella organisation, with a minimum capital of Rs 300 crore.
2. It can act as a self-regulatory body for small UCBs. It should provide cross liquidity and capital support to the UCBs when needed.
• Under the Banking Regulation (BR) Act, 1949 the RBI can prepare a scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies.
Supervisory Action Framework(SAF)
1. The objective of the Supervisory Action Framework (SAF) should be to find a timebound remedy to the financial stress of a bank
2. SAF should adopt a twin indicator approach, wherein asset quality and capital are measured through Net non-performing Asset(NNPA) and Capital to Risk-Weighted Assets Ratio(CRAR) respectively.
Use of Cloud Services
1. The committee preferred the use of Cloud services as it will standardise the information technology platform across all member UCBs and would eliminate the need to have the skills or hire services to maintain IT infrastructure.
Need of Reform:
• Restrictive Policies:
▪ Owing to lack of the desired level of regulatory comfort on account of the structural issues including ‘capital’ and the gaps in the statutory framework, the regulatory policies for co-operative banks have been restrictive with regard to their business operations, which, to some extent, has been one of the reasons affecting their growth.
▪ With the enactment of the Banking Regulation (Amendment) Act, 2020, the statutory gaps have been addressed to a very large extent.
o Financial Inclusion:
▪ Given the importance of the sector in furthering financial inclusion and considering the large number of its customer base, it is imperative that the strategies adopted for the regulation of the sector are
comprehensively reviewed so as to enhance its resilience and provide an enabling environment for its sustainable and stable growth in the medium term.
o Co-operative Banks, which are distinct from commercial banks, were born out of the concept of co-operative credit societies where members from a community group together to extend loans to each other, at favourable terms.
o Co-operative Banks are broadly classified into Urban and Rural co-operative banks based on their region of operation.
o They are registered under the Co-operative Societies Act of the State concerned or under the Multi-State Co-operative Societies Act, 2002.
o The Co-operative banks are governed by the
▪ Banking Regulations Act, 1949.
▪ Banking Laws (Co-operative Societies) Act, 1955.
• Features of Co-operative Banks:
o Customer Owned Entities: Co-operative bank members are both customer and owner of the bank.
o Democratic Member Control: These banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
o Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
o Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to masses in rural areas.
Basel III Norms
o Basel III is an internationally agreed set of measures developed by the Basel Committee on Bank Supervision in response to the financial crisis of 2007-09.
The measures aim to strengthen the regulation, supervision and risk management of banks.
o BCBS members are committed to implementing and applying standards in their jurisdictions within the time frame established by the Committee.
• Three Pillars: Basel 3 measures are based on three pillars:
o Pillar 1: Improve the banking sector’s ability to absorb ups and downs arising from financial and economic instability
o Pillar 2: Improve risk management ability and governance of banking sector
o Pillar 3: Strengthen banks’ transparency and disclosures